The House My Clients Built: Buying a Home as a Freelancer
Buying your first home can seem intimidating and scary, especially when the news is full of talk of mortgage crisis, and especially when you’re a freelancer without a steady paycheck to rely on. In fact, it can seem downright impossible.
The first time I was looking into buying a home, it was with my boyfriend: a nice, steady, engineer-type with a full-time job. I was freelancing lots of small gigs that added up to a nice income but didn’t look very reliable on paper. But we figured that with his undeniably reliable paycheck, a bank could be persuaded to give the two of us a mortgage.
Well, instead of buying our first place together, we broke up, and to me it looked like my hope of owning a home was gone, too. Sure, I was making money, and more every year, but like many freelancers, my income was erratic. I never had any idea what I would be earning more than eight weeks out. To make things worse, I had credit card debt and had been late a few times on bill payments. Plus, I’d never heard of a freelancer buying her own place without also hearing that her spouse had a steady job, or that the freelancer’s career was bringing in six figures.
Neither of those descriptions fit me, and wouldn’t anytime soon.
So, while I was digging into pints of ice cream mourning a broken relationship, I was also mourning the broken dream of homeownership. As far as I could tell, I was either going to have to wait for a (corporate) knight in shining armor, or save my pennies for about 20 years. Yeah, good luck to me.
That was more than a year ago. Then something very simple but very helpful happened. I was making a deposit at my bank last month, right in the middle of this mortgage crisis the world is finding itself in, and the banker was making small talk with me. He was double-checking all my information, including my address, and he asked me if I rented or owned.
“Rent,” I said.
“Want to set up an appointment with a mortgage broker?” he asked.
Yeah, it was a sales pitch, and we wouldn’t be in this lovely worldwide financial mess if banks had been less eager to lend to unqualified buyers, but that one simple question stopped me in my tracks. Maybe I’m not an unqualified buyer, I thought. Had I been selling myself short? After all, I’d paid off almost all of my debt, and had some money set aside. Why not get a little information from someone in a position to know?
“Sure,” I said, smiling.
Over the next few weeks, the crazy idea of buying a home as a freelancer began to seem not so crazy at all. In fact, it began to seem like it might actually be possible. I found out my credit score (excellent!) and started browsing real estate ads on craigslist. When I saw the co-op of my dreams – 850 square feet, with hardwood floors, gorgeous tile in the kitchen and bath, and enough space for a home office – I called multiple banks and filled out forms requesting preapprovals and commitment letters.
You know what? Every single one approved me. On my own. A freelancer. In the end I chose a 30-year fixed-rate mortgage at 6.0% from a major bank, whose representative always called me back quickly and answered my questions politely, even though I’m sure my mortgage was small potatoes compared to most of her other clients. For the 20% down payment, I used my savings and took an early distribution from my IRA (which I will have to pay taxes on next April).
To me, becoming a homeowner has the same undeniable appeal as freelancing: It demonstrates a certain independence. It liberates you from the whims of landlords and rent increases (bosses and pay cuts). And the fact that I’m doing it by myself makes this experience so much more gratifying than it would have a year ago, when I thought I needed someone else do it for me.
Hah. As freelancers, we know better.
Liz Tascio is a writer and editor who believes this Internet thing just might save the world. See why at humankindmedia.com.
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I’m a single dad with two kids and a full-time freelancer. I’m signing the documents for my first home – sole proprietor, thank you very much, and a duplex to boot – within seven days.
I am so nervous that I feel like throwing up every time I think about it. I will have this mortgage for 40 years. (Yes, 40 years.) If something goes wrong, I am fully responsible and there is no safety net.
Except what I’ve built. I’ve come this far. I am about to buy a house. I built a business strong enough to sit down at the bank and be accepted hands down for a mortgage. I am my own safety net.
Cheers – and here’s to freedom.
Well, I kinda fail to see where is the ‘achievement’ and ‘freedom’ on this one.
You are getting into a 30 and 40 year situation of paying a bank for your housing.. And you even admit that you are afraid that you might not be able to afford it in the long run.
Of course Greek reality is far from the one in the USA, yet… the facts that I ‘ve gathered point out that there is indeed a crisis in domestic market over there..
Is getting into this trip a smart move to do as a freelancer, especially in countries with an almost absent social welfare system (what would happen if things go bad)?
No offense but they were approving EVERYONE recently – hence, the mortgage crisis….
And having a home may make you feel independent, but it’s a ton of responsibility and work. Now you have to take care of a lawn, plumbing, electric, buy appliances, repair all sorts of stuff – and when it breaks and you need to call someone to fix it you pay more than you get as your hourly rate when before it came free with the rent. I’d rather have the 1000 ft apartment.
I’d think freelancers would prefer an apartment. We all work overwork ourselves, why add more work and expense.
Kudos to you, Liz, and to James. Don’t forget that a percentage of your mortgage is deductible as a business expense if you work out of your home.
This is a fantastic article showing that a steady paycheck != financial responsibility.
I’ve only been freelancing for 5 months, but I’ve wondered about applying for financing (a car, in my case). I’ve been absolutely terrified that I wouldn’t even get approved for the loan because I can’t guarantee I’ll have x amount in two months.
I do, however, know that my credit is good, and this article (and James’ comment) has proven that it is possible.
Nah, I’m not going to buy the car. But at least I know now that I could.
great post! gives me some hope! Around this time last year I decided i wanted to buy and started saving, i built up a nice little start to a stash when i decided to go full time freelance 6 months ago. I havent dipped into my nest egg, but my income is way lower now and i havent been able to save up cash like i used to. I havent lost faith though, it’ll take a little longer, but i will get there!
Hi Liza,
I do hope you have at least an emergency fund worth 6 months of your monthly expense to use if anything (accidents,disasters etc) happens. If none, I suggest you have one build it as soon as possible then save at least 10% of your earnings to a retirement fund (or mutual fund).
The thing about being a freelancer is uncertainty in terms of steady cash flow. Making sure you have at least an emergency fund will give you some piece of mind.
Sam
Fix My Personal Finance
http://fixmypersonalfinance.com
Congratulations!
It would be great to see more photographs as you move in.
It is good that you were able to achieve your dream of owning a home. Although I am not even close to owning my own home at the moment, I’m sure that this post will answer a lot of questions other freelancers have about this issue.
Also, I hope one day that you may find your “corporate” knight in shining armour!
Well, emergency cash is really very necessary for a freelancer in case something goes wrong (accidents, disasters etc). The amount depends on what type of expenses you have right now. I have been freelancing for about an year and I think I saved much money. In my case I always keep 12-18 months of bank balance in reserve plus some health insurance policies for illness or accidents.
As far as buying a house is concerned, I am pretty sure I wont be accepted for a loan as I have already checked it with few big banks and their rules are very strict here in India. Freelancing is not considered as a business here so for financing a big purchase I will have to be depending on my parents security initially until I build enough assets on me.
I am single right now so really not worried about a big purchase like a house or something expensive like that. For cars etc. I can buy these with cash as I have enough savings already. But I like to invest my savings in bonds and stocks. That is what I am doing right now.
Congratulations on the new house, and welcome to the world of home ownership. Jessica has a point, there is a lot of work to be done – but there is also satisfaction in doing the work. I’ve noticed after buying my first home I have another creative outlet, from decorating the interior to playing in the garden.
Also, I hope you put a disclaimer on taking a distribution on an IRA for home buying. This should be a last resort, and a decision not to be made lightly. Hopefully we all know the secret to retirement is putting money in the right places and growing it over time. And time is the biggest factor when looking at borrowing from an IRA. You should make replacing the money second priority after getting your emergency fund.
Buying a house and living in it is the single best thing you can do for your finances. In the USA, your mortgage interest is tax deductible making it that much better than renting. Here in Canada, our mortgage interest is not tax deductible, however when you sell your home any profit made is tax free if it’s your principal residence.
Even though you have a mortgage for 25 years or more, guess what – your mortgage does not go up, unlike rent. For freelancers in Canada, here’s another tip – if you have 25% down, you can get a mortgage anywhere. You don’t need a job, and you can even be bankrupt. And you don’t need to pay CMHC fees on 75% mortgages either. It’s only when you have less that 25% that you need to go through hoops and CMHC. Aim a little lower, buy out of town.
The best advice I heard for advancing your personal portfolio is to buy a house, live in it for 5 years, then if your income has increased sell it and buy a bigger house. Just match your motgage to your debt ratio appropriately, and trade up every 5 years. By the time you get to retirement you will be living in a mansion, which you can then sell and ‘downsize’, and pocket the rest (tax-free in Canada).
Great info everyone! I especially like the knowledge about the Canadian tax free loop hole, I will keep that in mind for the future.
I am currently in the process of buying a home also. It is very stressful, but everything seems to be going well. With all the foreclosed homes around it’s harder to get a loan, but the prices are great! The next couple of years I believe they may have to give homes away, if things get any worse. That may be a good reason to move outside the states.
I think the key is information – a lot of freelancers I know (my bf included) assume that they can’t get approved and don’t ask. He wound up in a precarious position during his divorce because his wife’s name was the only one on the deed of their home (she had the corporate gig).
Liz’s 20% down payment and excellent credit make her an attractive loan candidate to any bank, mortgage crisis or not. It pays to know the fine print, have helpful professionals and an optimistic frame of mind.
Congrats to your achievement!!
))))
First, I think it’s a shame that people are chastising Liz for taking the initiative to actually invest her money instead of throwing it down the drain each month by renting an apartment. Buying a home isn’t something to be taken lightly and is stressful for anyone, even more so for a freelancer–and I can speak from experience.
My husband and I have just started looking into qualifying for a loan and how much home we can afford. Through conversations with several banks, I’ve come to find that unless you are someone who has been freelancing for several years you’re going to be out of luck when it comes to qualifying for a loan. Loans for the self-employed are very strict, due to the current market.
I have been freelancing full-time since September of 2007. Before that I worked for a small ad agency and did a small amount of freelancing on the side… just some extra pocket money, less than $5k a year. What I found out is that banks want at least two years worth of tax records backing up your income as a freelancer (and they will only look at this income) and then they average the net income for those two years and use that to determine your yearly “salary.” And keep in mind they use net income, so if you have a good accountant and lots of deductibles, that small taxable income doesn’t look so rosy now.
Thinking of supplementing freelancing with a part-time job? Well, you must have at least 1-2 years worth of tax records for this job, as well. Otherwise, they will not include your earnings for the part-time job while considering your worth for a loan. The bank wants to see that you are in a stable work environment… if you’ve worked full-time partially for a year, it doesn’t matter. You aren’t working there anymore, so that’s not income you will be receiving when you are living in the home.
Currently I am on track to a comfortable income for 2008/2009, however if I average my net income for 2007 into my estimated net income for this upcoming year (we are looking to buy in the Spring of 2009) then my earnings will be so meager it will barely add to what my husband can qualify for on his own salary.
So, if you just started as a freelancer and are two years out from buying a home, you should be fine. If you have been freelancing for quite some time, you should be fine (now, by fine I mean you’ll be able to qualify, but the amount you qualify for is up to your own personal earnings). However, if you are in my situation and are somewhere in between—lenders will recommend you get full-time employment. And the kicker is, you only need to be employed full-time for 30 days prior to the time of applying for a loan or have a contract of commitment from your employer that they have offered you a full-time position at $x salary.
I can say one thing, though–if Liz got this loan anytime recently, it wasn’t just given to her. Banks are very aware of who they are lending to now and are taking necessary measures to cover their a**.
Congrats!
Liz, did you actually get the mortgage?
I just bought a HUD (foreclosed) house with my wife, and I had been freelancing for the past year. I would recommend this for freelancers, because you get amazing deals, sometimes with 40k + equity built in like ours.
Thanks, everyone! Yes, Tommy, I did get the mortgage. I just closed a couple of weeks ago, and now I’m happily setting up my new home. I completely agree with the posters who say it’s imperative to have an emergency savings account, and I also agree that taking an early distribution from a retirement account to make a down payment should really be a last resort. I don’t regret it at all, even as I save to pay the extra taxes in April. And excellent point, Kelly’s — it’s all about getting the information instead of assuming homeownership is out of reach!
@Sam
yes, i have a good 6+months saved, and set 20% away from income each month for taxes/insurance, etc.
im making more than i NEED to get by, but that still less than from my old corporate job. each month it grows a little more, so thats a good thing.
thanks for a post that is for freelancers but talks about lifes of them
Thanks for writing this inspiring post. Now I know that if I stay the course, that yes, it is possible to be a freelancer and a homeowner at the same time:)
Actually this was a good article and a nice change of pace from the steady 500 WAYS TO GET THAT DREAM CLIENT articles that always fill out the place. I would have liked to have seen it a little more detailed, like payments, a photo or two, but it was a good article nonetheless.
Hi Liz,
Great article and a great experience! To be validated for your own earning power! I liked James Chartrand’s comment that “I am my own safety net”. Buying your own home is scary, being a freelancer is scary, and most things worthwhile are bit scary it seems.
Way to go!
Well, James Chartrand, maybe if you weren’t so self-righteous and obsessed with your own idea of “fairness,” which apparently consists of charging 20% of what you think your work is worth, you wouldn’t be stuck with a 40-YEAR mortgage. Normal working people get 15-, 20-, or 30-year mortgages. You’ll be paying that baby well into your 70s. Nice work, man. What a sacrifice! Save your clients some money, so you can pay more interest money to the bank. You could double your rates and still charge only 40% of what you claim you could charge. And you could put the additional income toward your mortgage. But that wouldn’t be “fair,” would it? Apparently you think that working for the bank for an extra 10 or 20 years is “fair.” It’s your life. Just stop calling yourself a “freelancer,” OK?